The MSRP is a very simple concept: The manufacturer suggests that all retailers sell it (at least the initial run) at precisely this price.

Why would they want to do that? There is basically only one possible reason: They are trying to sustain tacit collusion.

The game theory of this is rather subtle: It requires that both manufacturers and retailers engage in long-term relationships with one another, and can pick and choose who to work with based on the history of past behavior. Both of these conditions hold in most real-world situations—indeed, the fact that they don’t hold very well in the agriculture industry is probably why we don’t see MSRP on produce.

If pricing were decided by random matching with no long-term relationships or past history, MSRP would be useless. Each firm would have little choice but to set their own optimal price, probably just slightly over their own marginal cost. Even if the manufacturer suggested an MSRP, retailers would promptly and thoroughly ignore it.

This is because the one-shot Bertrand pricing game has a unique Nash equilibrium, at pricing just above marginal cost. The basic argument is as follows: If I price cheaper than you, I can claim the whole market. As long as it’s profitable for me to do that, I will. The only time it’s not profitable for me to undercut you in this way is if we are both charging just slightly above marginal cost—so that is what we shall do, in Nash equilibrium. Human beings don’t always play according to the Nash equilibrium, but for-profit corporations do so quite consistently. Humans have limited attention and moral values; corporations have accounting departments and a fanatical devotion to the One True Profit.

But the iterated Bertrand pricing game is quite different. If instead of making only one pricing decision, we make many pricing decisions over time, always with a high probability of encountering the same buyers and sellers again in the future, then I may not want to undercut your price, for fear of triggering a price warthat will hurt both of our firms.

Much like how the Iterated Prisoner’s Dilemma can sustain cooperation in Nash equilibrium while the one-shot Prisoner’s Dilemma cannot, the iterated Bertrand game can sustain collusion as a Nash equilibrium.

There is in fact a vast number of possible equilibria in the iterated Bertrand game. If prices were infinitely divisible, there would be an infinite number of equilibria. In reality, there are hundreds or thousands of equilibria, depending on how finely divisible the price may be.

This makes the iterated Bertrand game a coordination game—there are many possible equilibria, and our task is to figure out which one to coordinate on.

If we had perfect information, we could deduce what the monopoly price would be, and then all choose the monopoly price; this would be what we call “payoff dominant”, and it’s often what people actually try to choose in real-world coordination games.

But in reality, the monopoly price is a subtle and complicated thing, and might not even be the same between different retailers. So if we each try to compute a monopoly price, we may end up with different results, and then we could trigger a price war and end up driving all of our profits down. If only there were some way to communicate with one another, and say what price we all want to set?

There are all sorts of subtler arguments about how MSRP is justifiable, but as far as I can tell they all fall flat. If you’re worried about retailers not promoting your product enough, enter into a contract requiring them to promote. Proposing a suggested price is clearly nothing but an attempt to coordinate tacit—frankly not even that tacit—collusion.

MSRP also probably serves another, equally suspect, function, which is to manipulate consumers using the anchoring heuristic: If the MSRP is $59.99, then when it does go on sale for $49.99 you feel like you are getting a good deal; whereas, if it had just been priced at $49.99 to begin with, you might still have felt that it was too expensive. I see no reason why this sort of crass manipulation of consumers should be protected under the law either, especially when it would be so easy to avoid.

There are all sorts of ways for firms to tacitly collude with one another, and we may not be able to regulate them all. But the MSRP is literally printed on the box. It’s so utterly blatant that we could very easily make it illegal with hardly any effort at all. The fact that we allow such overt price communication makes a mockery of our antitrust law.

Imagine what it would be like to live in a country with an oppressive totalitarian dictator. For millions of people around the world, this is already reality. For us in the United States, it’s becoming more terrifyingly plausible all the time.

You would probably want to get rid of this dictator. And even if you aren’t in the government yourself, there are certainly things you could do to help with that: Join protests, hide political dissenters in your basement, publish refutations of the official propaganda on the Internet. But all of these things carry great risks. How do you know whether it’s worth the risk?

Well, a very important consideration in that reasoning is how many other people agree with you. In the extreme case where everyone but the dictator agrees with you, overthrowing him should be no problem. In the other extreme case where nobody agrees with you, attempting to overthrow him will inevitably result in being imprisoned and tortured as a political prisoner. Everywhere in between, your probability of success increases as the number of people who agree with you increases.

But how do you know how many people agree with you? You can’t just ask them—simply asking someone “Do you support the dictator?” is a dangerous thing to do in a totalitarian society. Simply by asking around, you could get yourself into a lot of trouble. And if people think you might be asking on behalf of the government, they’re always going to say they support the dictator whether or not they do.

If you believe that enough people would support you, you will take action against the dictator. But if you don’t believe that, you won’t take the chance. Now, consider the fact that many other people are in the same position: They too would only take action if they believed others would.

You are now in what’s called a coordination game. The best decision for you depends upon what everyone else decides. There are two equilibrium outcomes of this game: In one, you all keep your mouths shut and the dictator continues to oppress you. In the other, you all rise up together and overthrow the dictator. But if you take an action out of equilibrium, that could be very bad for you: If you rise up against the dictator without support, you’ll be imprisoned and tortured. If you support the dictator while others try to overthrow him, you might be held responsible for some of his crimes once the coup d’etat is complete.

And what about people who do support the dictator? They might still be willing to go along with overthrowing him, if they saw the writing on the wall. But if they think the dictator can still win, they will stand with him. So their beliefs, also, are vital in deciding whether to try to overthrow the dictator.

This results in a self-fulfilling norm. The dictator can be overthrown, if and only if enough people believe that the dictator can be overthrown.

There are much more mundane examples of of self-fulfilling norms. Most of our traffic laws are actually self-fulfilling norms as much as they are real laws; enforcement is remarkably weak, particularly when you compare it to the rate of compliance. Most of us have driven faster than the speed limit or run a red light on occasion; but how often do you drive on the wrong side of the road, or stop on green and go on red? It is best to drive on the right side of the road if, and only if, everyone believes it is best to drive on the right side of the road. That’s a self-fulfilling norm.

Self-fulfilling norms are a greatly underappreciated force in global history. We often speak as though historical changes are made by “great men”—powerful individuals who effect chance through their charisma or sheer force of will. But that power didn’t exist in a vacuum. For good (Martin Luther King) or for ill (Adolf Hitler), “great men” only have their power because they can amass followers. The reason they can amass followers is that a large number of people already agree with them—but are too afraid to speak up, because they are trapped in a self-fulfilling norm. The primary function of a great leader is to announce—at great personal risk—views that they believe others already hold. If indeed they are correct, then they can amass followers by winning the coordination game. If they are wrong, they may suffer terribly at the hands of a populace that hates them.

There is persuasion involved, but typically it’s not actually persuading people to believe that something is right; it’s persuading people to actually take action, convincing them that there is really enough chance of succeeding that it is worth the risk. Because of the self-fulfilling norm, this is a very all-or-nothing affair; do it right and you win, but do it wrong and your whole movement collapses. You essentially need to know exactly what battles you can win, so that you only fight those battles.

The good news is that information technology may actually make this easier. Honest assessment of people’s anonymous opinions is now easier than ever. Large-scale coordination of activity with relative security is now extremely easy, as we saw in the Arab Spring. This means that we are entering an era of rapid social change, where self-fulfilling norms will rise and fall at a rate never before seen.

In the best-case scenario, this means we get rid of all the bad norms and society becomes much better.

In the worst-case scenario, we may find out that most people actually believe in the bad norms, and this makes those norms all the more entrenched.

There’s a very common economics experiment called a public goods game, often used to study cooperation and altruistic behavior. I’m actually planning on running a variant of such an experiment for my second-year paper.

The game is quite simple, which is part of why it is used so frequently: You are placed into a group of people (usually about four), and given a little bit of money (say $10). Then you are offered a choice: You can keep the money, or you can donate some of it to a group fund. Money in the group fund will be multiplied by some factor (usually about two) and then redistributed evenly to everyone in the group. So for example if you donate $5, that will become $10, split four ways, so you’ll get back $2.50.

Donating more to the group will benefit everyone else, but at a cost to yourself. The game is usually set up so that the best outcome for everyone is if everyone donates the maximum amount, but the best outcome for you, holding everyone else’s choices constant, is to donate nothing and keep it all.

Yet it is a very robust finding that most people do neither of those things. There’s still a good deal of uncertainty surrounding what motivates people to donate what they do, but certain patterns that have emerged:

Most people donate something, but hardly anyone donates everything.

Increasing the multiplier tends to smoothly increase how much people donate.

The number of people in the group isn’t very important, though very small groups (e.g. 2) behave differently from very large groups (e.g. 50).

Letting people talk to each other tends to increase the rate of donations.

Repetition of the game, or experience from previous games, tends to result in decreasing donation over time.

Economists donate less than other people.

Number 6 is unfortunate, but easy to explain: Indoctrination into game theory and neoclassical economics has taught economists that selfish behavior is efficient and optimal, so they behave selfishly.

Number 3 is also fairly easy to explain: Very small groups allow opportunities for punishment and coordination that don’t exist in large groups. Think about how you would respond when faced with 2 defectors in a group of 4 as opposed to 10 defectors in a group of 50. You could punish the 2 by giving less next round; but punishing the 10 would end up punishing 40 others who had contributed like they were supposed to.

Number 4 is a very interesting finding. Game theory says that communication shouldn’t matter, because there is a unique Nash equilibrium: Donate nothing. All the promises in the world can’t change what is the optimal response in the game. But in fact, human beings don’t like to break their promises, and so when you get a bunch of people together and they all agree to donate, most of them will carry through on that agreement most of the time.

Number 5 is on the frontier of research right now. There are various theoretical accounts for why it might occur, but none of the models proposed so far have much predictive power.

But my focus today will be on findings 1 and 2.

If you’re not familiar with the underlying game theory, finding 2 may seem obvious to you: Well, of course if you increase the payoff for donating, people will donate more! It’s precisely that sense of obviousness which I am going to appeal to in a moment.

In fact, the game theory makes a very sharp prediction: For N players, if the multiplier is less than N, you should always contribute nothing. Only if the multiplier becomes larger than N should you donate—and at that point you should donate everything. The game theory prediction is not a smooth increase; it’s all-or-nothing. The only time game theory predicts intermediate amounts is on the knife-edge at exactly equal to N, where each player would be indifferent between donating and not donating.

But it feels reasonable that increasing the multiplier should increase donation, doesn’t it? It’s a “safer bet” in some sense to donate $1 if the payoff to everyone is $3 and the payoff to yourself is $0.75 than if the payoff to everyone is $1.04 and the payoff to yourself is $0.26. The cost-benefit analysis comes out better: In the former case, you can gain up to $2 if everyone donates, but would only lose $0.25 if you donate alone; but in the latter case, you would only gain $0.04 if everyone donates, and would lose $0.74 if you donate alone.

Human beings like to “sanity-check” our results against prior knowledge, making sure that everything fits together. And, of particular note for public goods games, human beings like to “hedge our bets”; we don’t like to over-commit to a single belief in the face of uncertainty.

I think this is what best explains findings 1 and 2. We don’t donate everything, because that requires committing totally to the belief that contributing is always better. We also don’t donate nothing, because that requires committing totally to the belief that contributing is always worse.

And of course we donate more as the payoffs to donating more increase; that also just seems reasonable. If something is better, you do more of it!

These choices could be modeled formally by assigning some sort of probability distribution over other’s choices, but in a rather unconventional way. We can’t simply assume that other people will randomly choose some decision and then optimize accordingly—that just gives you back the game theory prediction. We have to assume that our behavior and the behavior of others is in some sense correlated; if we decide to donate, we reason that others are more likely to donate as well.

Stated like that, this sounds irrational; some economists have taken to calling it “magical thinking”. Yet, as I always like to point out to such economists: On average, people who do that make more money in the games.Economists playing other economists always make very little money in these games, because they turn on each other immediately. So who is “irrational” now?

Indeed, if you ask people to predict how others will behave in these games, they generally do better than the game theory prediction: They say, correctly, that some people will give nothing, most will give something, and hardly any will give everything. The same “reasonableness” that they use to motivate their own decisions, they also accurately apply to forecasting the decisions of others.

Of course, to say that something is “reasonable” may be ultimately to say that it conforms to our heuristics well. To really have a theory, I need to specify exactly what those heuristics are.

“Don’t put all your eggs in one basket” seems to be one, but it’s probably not the only one that matters; my guess is that there are circumstances in which people would actually choose all-or-nothing, like if we said that the multiplier was 0.5 (so everyone giving to the group would make everyone worse off) or 10 (so that giving to the group makes you and everyone else way better off).

“Higher payoffs are better” is probably one as well, but precisely formulating that is actually surprisingly difficult. Higher payoffs for you? For the group? Conditional on what? Do you hold others’ behavior constant, or assume it is somehow affected by your own choices?

And of course, the theory wouldn’t be much good if it only worked on public goods games (though even that would be a substantial advance at this point). We want a theory that explains a broad class of human behavior; we can start with simple economics experiments, but ultimately we want to extend it to real-world choices.

Advertising is everywhere in our society. You may see some on this very page (though if I hit my next Patreon target I’m going to pay to get rid of those). Ad-blockers can help when you’re on the Web, and premium channels like HBO will save you from ads when watching TV, but what are you supposed to do about ads on billboards as you drive down the highway, ads on buses as you walk down the street, ads on the walls of the subway train?

And yet, advertising is almost pure rent-seeking. It costs resources, but it doesn’t produce anything. In most cases it doesn’t even raise awareness about something or find new customers. The primary goal of most advertising is to get you to choose that brand instead of a different brand. A secondary goal (especially for food ads) is to increase your overall consumption of that good, but since the means employed typically involve psychological manipulation, this increase in consumption is probably harmful to social welfare.

A general principle of economics that has almost universal consensus is the Pigou Principle: If you want less of something, you should put a tax on it. So, what would happen if we put a tax on advertising?

The amazing thing is that in this case, we would probably not actually reduce advertising spending, but we would reduce advertising, which is what we actually care about. Moreover, we would be able to raise an enormous amount of revenue with zero social cost. Like the other big Pigovian tax (the carbon tax), this a rare example of a tax that will give you a huge amount of revenue while actually yielding a benefit to society.

This is far from obvious, so I think it is worth explaining where it comes from.

The key point is that advertising doesn’t typically increase the overall size of the market (though in some cases it does; I’ll get back to that in a moment). Rather that a conventional production function like we would have for most types of expenditure, advertising is better modeled by what is called a contest function(something that our own Stergios Skaperdas at UCI is actually a world-class expert in). In a production function, inputs increase the total amount of output. But in a contest function, inputs only redistribute output from one place to another. Contest functions thus provide a good model of rent-seeking, which is what most advertising is.

Suppose there’s a total market M for some good, where M is the total profits that can be gained from capturing that entire market.
Then, to keep it simple, let’s suppose there are only two major firms in the market, a duopolylike Coke and Pepsi or Boeing and Airbus.

Let’s say Coke decides to spend an amount x on advertising, and Pepsi decides to spend an amount y.

For now, let’s assume that total beverage consumption won’t change; so the total profits to be had from the market are always M.

What advertising does is it changes the share of that market which each firm will get. Specifically, let’s use the simplest model, where the share of the market is equal to the share of advertising spending.

Then the net profit for Coke is the following:

The share they get, x/(x+y), times the size of the whole market, M, minus the advertising spending x.

What would happen if we introduce a tax? Let’s say we introduce a proportional tax r on all advertising spending. That is, for every dollar you spend on advertising, you must pay the government $r in tax. The really remarkable thing is that companies who advertise shouldn’t care what we make the tax; the only ones who will care are the advertising companies themselves.

But notice that the share of total advertising spending is completely unchanged!

(x(1-r))/(x(1-r) + y(1-r)) = x/(x+y)

Since the payoff for Coke only depends on how much Coke spends and what market share they get, it is also unchanged. Since the same is true for Pepsi, nothing will change in how the two companies behave. They will spend the same amount on advertising, and they will receive the same amount of net income when all is said and done.

The total quantity of advertising will be reduced, from x+y to (x+y)(1-r). That means fewer billboards, fewer posters in subway stations, fewer TV commercials. That will hurt advertising companies, but benefit everyone else.

How much revenue will we get for the government? r x + r y = r(x+y).

Since the goal is to substantially reduce advertising output, and it won’t distort other industries in any way, we should set this tax quite high. A reasonable value for r would be 50%. We might even want to consider something as high as 90%; but for now let’s look at what 50% would do.

Total advertising spending in the US is over $200 billion per year. Since an advertising tax would not change total advertising spending, we can expect that a tax rate of 50% would simply capture 50% of this spending as revenue, which is to say $100 billion per year. That would be enough to pay for the entire Federal education budget, or the foreign aid and environment budgets combined.
Another great aspect of how an advertising tax is actually better than a carbon tax is that countries will want to compete to have the highest advertising taxes. If say Canada imposes a carbon tax but the US doesn’t, industries will move production to the US where it is cheaper, which hurts Canada. Yet the total amount of pollution will remain about the same, and Canada will be just as affected by climate change as they would have been anyway. So we need to coordinate across countries so that the carbon taxes are all the same (or at least close), to prevent industries from moving around; and each country has an incentive to cheat by imposing a lower carbon tax.

But advertising taxes aren’t like that. If Canada imposes an advertising tax and the US doesn’t, companies won’t shift production to the US; they will shift advertising to the US. And having your country suddenly flooded with advertisements is bad. That provides a strong incentive for you to impose your own equal or even higher advertising tax to stem the tide. And pretty soon, everyone will have imposed an advertising tax at the same rate.

Of course, in all the above I’ve assumed a pure contest function, meaning that advertisements are completely unproductive. What if they are at least a little bit productive? Then we wouldn’t want to set the tax too high, but the basic conclusions would be unchanged.

Suppose, for instance, that the advertising spending adds half its value to the value of the market. This is a pretty high estimate of the benefits of advertising.

Under this assumption, in place of M we have M+(x+y)/2. Everything else is unchanged.

We can maximize as before:

max (M+(x+y)/2)*x/(x+y) – x

The math is a bit trickier, but we can still solve by a first-order condition, which simplifies to:

(x+y)^2 = 2My

By the same symmetry reasoning as before:

(2x)^2 = 2Mx

x = M/2

Now, total advertising spending would equal the size of the market without advertising, and net income for each firm after advertising would be:

What’s the downside of this tax? Unlike most taxes, there really isn’t one. Yes, it would hurt advertising companies, which I suppose counts as a downside. But that was mostly waste anyway; anyone employed in advertising would be better employed almost anywhere else. Millions of minds are being wasted coming up with better ways to sell Viagra instead of better treatments for cancer. Any unemployment introduced by an advertising tax would be temporary and easily rectified by monetary policy, and most of it would hit highly educated white-collar professionals who have high incomes to begin with and can more easily find jobs when displaced.

The real question is why we aren’t doing this already. And that, I suppose, has to come down to politics.

But really what bothers me is not the DSGE but the GTFO (“get the [expletive] out”); it’s not that DSGE models are used, but that it’s almost impossible to get published as a macroeconomic theorist using anything else. Defenders of DSGE typically don’t even argue anymore that it is good; they argue that there are no credible alternatives. They characterize their opponents as “dilettantes” who aren’t opposing DSGE because we disagree with it; no, it must be because we don’t understand it. (Also, regarding that post, I’d just like to note that I now officially satisfy the Athreya Axiom of Absolute Arrogance: I have passed my qualifying exams in a top-50 economics PhD program. Yet my enmity toward DSGE has, if anything, only intensified.)

Of course, that argument only makes sense if you haven’t been actively suppressing all attempts to formulate an alternative, which is precisely what DSGE macroeconomists have been doing for the last two or three decades. And yet despite this suppression, there are alternatives emerging, particularly from the empirical side. There are now empirical approaches to macroeconomics that don’t use DSGE models. Regression discontinuity methods and other “natural experiment” designs—not to mention actual experiments—are quickly rising in popularity as economists realize that these methods allow us to actually empirically test our models instead of just adding more and more mathematical complexity to them.

But there still seems to be a lingering attitude that there is no other way to do macro theory. This is very frustrating for me personally, because deep down I think what I would like to do as a career is macro theory: By temperament I have always viewed the world through a very abstract, theoretical lens, and the issues I care most about—particularly inequality, development, and unemployment—are all fundamentally “macro” issues. I left physics when I realized I would be expected to do string theory. I don’t want to leave economics now that I’m expected to do DSGE. But I also definitely don’t want to do DSGE.

Fortunately with economics I have a backup plan: I can always be an “applied micreconomist” (rather the opposite of a theoretical macroeconomist I suppose), directly attached to the data in the form of empirical analyses or even direct, randomized controlled experiments. And there certainly is plenty of work to be done along the lines of Akerlof and Roth and Shiller and Kahneman and Thaler in cognitive and behavioral economics, which is also generally considered applied micro. I was never going to be an experimental physicist, but I can be an experimental economist. And I do get to use at least some theory: In particular, there’s an awful lot of game theory in experimental economics these days. Some of the most exciting stuff is actually in showing how human beings don’t behave the way classical game theory predicts (particularly in the Ultimatum Game and the Prisoner’s Dilemma), and trying to extend game theory into something that would fit our actual behavior. Cognitive science suggests that the result is going to end up looking quite different from game theory as we know it, and with my cognitive science background I may be particularly well-positioned to lead that charge.

Still, I don’t think I’ll be entirely satisfied if I can’t somehow bring my career back around to macroeconomic issues, and particularly the great elephant in the room of all economics, which is inequality. Underlying everything from Marxism to Trumpism, from the surging rents in Silicon Valley and the crushing poverty of Burkina Faso, to the Great Recession itself, is inequality. It is, in my view, the central question of economics: Who gets what, and why?

That is a fundamentally macro question, but you can’t even talk about that issue in DSGE as we know it; a “representative agent” inherently smooths over all inequality in the economy as though total GDP were all that mattered. A fundamentally new approach to macroeconomics is needed. Hopefully I can be part of that, but from my current position I don’t feel much empowered to fight this status quo. Maybe I need to spend at least a few more years doing something else, making a name for myself, and then I’ll be able to come back to this fight with a stronger position.

In the meantime, I guess there’s plenty of work to be done on cognitive biases and deviations from game theory.

If we are honest, most of us would agree that there is something about our own behavior that could stand to be improved. So why do we so rarely succeed in actually making such improvements?

One possibility, which I’m guessing most neoclassical economists would favor, is to say that we don’t actually want to. We may pretend that we do in order to appease others, but ultimately our rational optimization has already chosen that we won’t actually bear the cost to make the improvement.

I think this is actually quite rare. I’ve seen too many people with resolutions they didn’t share with anyone, for example, to think that it’s all about social pressure. And I’ve seen far too many people try very hard to achieve their resolutions, day after day, and yet still fail.

Sometimes we make resolutions that are not entirely within our control, such as “get a better job” or “find a girlfriend” (last year I made a resolution to publish a work of commercial fiction or a peer-reviewed article—and alas, failed at that task, unless I somehow manage it in the next few days). Such resolutions may actually be unwise to make in the first place, as it can feel like breaking a promise to yourself when you’ve actually done all you possibly could.

So let’s set those aside and talk only about things we should be in control over, like “lose weight” or “save more money”. Even these kinds of resolutions typically fail; why? What is this “weakness of will”? How is it possible to really want something that you are in full control over, and yet still fail to accomplish it?

Well, first of all, I should be clear what I mean by “in full control over”. In some sense you’re not in full control, which is exactly the problem. Your conscious mind is not actually an absolute tyrant over your entire body; you’re more like an elected president who has to deal with a legislature in order to enact policy.

You do have a great deal of power over your own behavior, and you can learn to improve this control (much as real executive power in presidential democracies has expanded over the last century!); but there are fundamental limits to just how well you can actually consciously will your body to do anything, limits imposed by billions of years of evolution that established most of the traits of your body and nervous system millions of generations before there even was such a thing as rational conscious reasoning.

I think the government metaphor is helpful here; if you President of the United States and you want something done, do you state some vague, broad goal like “Improve the economy”? No, you make a specific, actionable demand that allows you to enforce compliance, like “increase infrastructure spending by 24% over the next 5 years”. Even then it is possible to fail if you can’t push it through the legislature (in the metaphor, the “legislature” is your habits, instincts and other subconscious processes), but you’re much more likely to succeed if you have a detailed plan.

This salience effect has a lot to do with the fact that human beings are terrible at dealing with the future.

Rationally, we are supposed to use exponential discounting; each successive moment is supposed to be worth less to us than the previous by a fixed proportion, say 5% per year. This is actually a mathematical theorem; if you don’t discount this way, your decisions will be systematically irrational.

And yet… we don’t discount that way. Some behavioral economists argue that we use hyperbolic discounting, in which instead of discounting time by a fixed proportion, we use a different formula that drops off too quickly early on and not quickly enough later on.

But I am increasingly convinced that human beings don’t actually use discounting at all. We have a series of rough-and-ready heuristics for making future judgments, which can sort of act like discounting, but require far less computation than actually calculating a proper discount rate. (Recent empirical evidence seems to be tilting this direction.)

In any case, whatever we do is clearly not a proper rational discount rate. And this means that our behavior can be time-inconsistent; a choice that seems rational at one time can not seem rational at a later time. When we’re planning out our year and saying we will hit the treadmill more, it seems like a good idea; but when we actually get to the gym and feel our legs ache as we start running, we begin to regret our decision.

The challenge, really, is determining which “version” of us is correct! A priori, we don’t actually know whether the view of our distant self contemplating the future or the view of our current self making the choice in the moment is the right one. Actually, when I frame it this way, it almost seems like the self that’s closer to the choice should have better information—and yet typically we think the exact opposite, that it is our past self making plans that really knows what’s best for us.

So where does that come from? Why do we think, at least in most cases, that the “me” which makes a plan a year in advance is the smart one, and the “me” that actually decides in the moment is untrustworthy.

Kahneman has a good explanation for this, in his model of System 1 and System 2. System 1 is simple and fast, but often gets the wrong answer. System 2 usually gets the right answer, but it is complex and slow. When we are making plans, we have a lot of time to think, and we can afford to expend the extra effort to engage the full power of System 2. But when we are living in the moment, choosing what to do right now, we don’t have that luxury of time, and we are forced to fall back on System 1. System 1 is easier—but it’s also much more likely to be wrong.

How, then, do we resolve this conflict? Commitment. (Perhaps that’s why it’s called a New Year’s resolution!)

We make promises to ourselves, commitments that we will feel bad about not following through.

If we rationally discounted, this would be a baffling thing to do; we’re just imposing costs on ourselves for no reason. But because we don’t discount rationally, commitments allow us to change the calculation for our future selves.

This brings me to one last strategy to use when making your resolutions: Include punishment.

“I will work out at least 2 hours per week, and if I don’t, I’m not allowed to watch TV all weekend.” Now that is a resolution you are actually likely to keep.

To see why, consider the decision problem for your System 2 self today versus your System 1 self throughout the year.

Your System 2 self has done the cost-benefit analysis and ruled that working out 2 hours per week is worthwhile for its health benefits.

If you left it at that, your System 1 self would each day find an excuse to procrastinate the workouts, because at least from where they’re sitting, working out for 2 hours looks a lot more painful than the marginal loss in health from missing just this one week. And of course this will keep happening, week after week—and then 52 go by and you’ve had few if any workouts.

But by adding the punishment of “no TV”, you have imposed an additional cost on your System 1 self, something that they care about. Suddenly the calculation changes; it’s not just 2 hours of workout weighed against vague long-run health benefits, but 2 hours of workout weighed against no TV all weekend. That punishment is surely too much to bear; so you’d best do the workout after all.

Do it right, and you will rarely if ever have to impose the punishment. But don’t make it too large, or then it will seem unreasonable and you won’t want to enforce it if you ever actually need to. Your System 1 self will then know this, and treat the punishment as nonexistent. (Formally the equilibrium is not subgame perfect; I am gravely concerned that our nuclear deterrence policy suffers from precisely this flaw.) “If I don’t work out, I’ll kill myself” is a recipe for depression, not healthy exercise habits.

But if you set clear, actionable objectives and sufficient but reasonable punishments, there’s at least a good chance you will actually be in the minority of people who actually succeed in keeping their New Year’s resolution.

When this post goes live, it will be Christmas; so I felt I should make the topic somehow involve the subject of Christmas, or holidays in general.

I decided I would pull back for as much perspective as possible, and ask this question: Why do we have holidays in the first place?

All human cultures have holidays, but not the same ones. Cultures with a lot of mutual contact will tend to synchronize their holidays temporally, but still often preserve wildly different rituals on those same holidays. Yes, we celebrate “Christmas” in both the US and in Austria; but I think they are baffled by the Elf on the Shelf and I know that I find the Krampus bizarre and terrifying.

Most cultures from temperate climates have some sort of celebration around the winter solstice, probably because this is an ecologically important time for us. Our food production is about to get much, much lower, so we’d better make sure we have sufficient quantities stored. (In an era of globalization and processed food that lasts for months, this is less important, of course.) But they aren’t the same celebration, and they generally aren’t exactly on the solstice.

What is a holiday, anyway? We all get off work, we visit our families, and we go through a series of ritualized actions with some sort of symbolic cultural meaning. Why do we do this?

First, why not work all year round? Wouldn’t that be more efficient? Well, no, because human beings are subject to exhaustion. We need to rest at least sometimes.

Well, why not simply have each person rest whenever they need to? Well, how do we know they need to? Do we just take their word for it? People might exaggerate their need for rest in order to shirk their duties and free-ride on the work of others.

It would help if we could have pre-scheduled rest times, to remove individual discretion.

Should we have these at the same time for everyone, or at different times for each person?

Well, from the perspective of efficiency, different times for each person would probably make the most sense. We could trade off work in shifts that way, and ensure production keeps moving. So why don’t we do that?
Well, now we get to the game theory part. Do you want to be the only one who gets today off? Or do you want other people to get today off as well?

You probably want other people to be off work today as well, at least your family and friends so that you can spend time with them. In fact, this is probably more important to you than having any particular day off.

We can write this as a normal-form game. Suppose we have four days to choose from, 1 through 4, and two people, who can each decide which day to take off, or they can not take a day off at all. They each get a payoff of 1 if they take the same day off, 0 if they take different days off, and -1 if they don’t take a day off at all. This is our resulting payoff matrix:

1

2

3

4

None

1

1/1

0/0

0/0

0/0

0/-1

2

0/0

1/1

0/0

0/0

0/-1

3

0/0

0/0

1/1

0/0

0/-1

4

0/0

0/0

0/0

1/1

0/-1

None

-1/0

-1/0

-1/0

-1/0

-1/-1

It’s pretty obvious that each person will take some day off. But which day? How do they decide that?
This is what we call a coordination game; there are many possible equilibria to choose from, and the payoffs are highest if people can somehow coordinate their behavior.

If they can actually coordinate directly, it’s simple; one person should just suggest a day, and since the other one is indifferent, they have no reason not to agree to that day. From that point forward, they have coordinated on a equilibrium (a Nash equilibrium, in point of fact).

But suppose they can’t talk to each other, or suppose there aren’t two people to coordinate but dozens, or hundreds—or even thousands, once you include all the interlocking social networks. How could they find a way to coordinate on the same day?

They need something more intuitive, some “obvious” choice that they can call upon that they hope everyone else will as well. Even if they can’t communicate, as long as they can observe whether their coordination has succeeded or failed they can try to set these “obvious” choices by successive trial and error.

The result is what we call a Schelling point; players converge on this equilibrium not because there’s actually anything better about it, but because it seems obvious and they expect everyone else to think it will also seem obvious.

This is what I think is happening with holidays. Yes, we make up stories to justify them, or sometimes even have genuine reasons for them (Independence Day actually makes sense being on July 4, for instance), but the ultimate reason why we have a holiday on one day rather than other is that we had to have it some time, and this was a way of breaking the deadlock and finally setting a date.

In fact, weekends are probably a more optimal solution to this coordination problem than holidays, because human beings need rest on a fairly regular basis, not just every few months. Holiday seasons now serve more as an opportunity to have long vacations that allow travel, rather than as a rest between work days. But even those we had to originally justify as a matter of religion: Jews would not work on Saturday, Christians would not work on Sunday, so together we will not work on Saturday or Sunday. The logic here is hardly impeccable (why not make it religion-specific, for example?), but it was enough to give us a Schelling point.

This makes me wonder about what it would take to create a new holiday. How could we actually get people to celebrate Darwin Day or Sagan Day on a large scale, for example? Darwin and Sagan are both a lot more worth celebrating than most of the people who get holidays—Columbus especially leaps to mind. But even among those of us who really love Darwin and Sagan, these are sort of half-hearted celebrations that never attain the same status as Easter, much less Thanksgiving or Christmas.

I’d also like to secularize—or at least ecumenicalize—the winter solstice celebration. Christianity shouldn’t have a monopoly on what is really something like a human universal, or at least a “humans who live in temperate climates” universal. It really isn’t Christmas anyway; most of what we do is celebrating Yule, compounded by a modern expression in mass consumption that is thoroughly borne of modern capitalism. We have no reason to think Jesus was actually born in December, much less on the 25th. But that’s around the time when lots of other celebrations were going on anyway, and it’s much easier to convince people that they should change the name of their holiday than that they should stop celebrating it and start celebrating something else—I think precisely because that still preserves the Schelling point.

Creating holidays has obviously been done before—indeed it is literally the only way holidays ever come into existence. But part of their structure seems to be that the more transparent the reasons for choosing that date and those rituals, the more empty and insincere the holiday seems. Once you admit that this is an arbitrary choice meant to converge an equilibrium, it stops seeming like a good choice anymore.

Now, if we could find dates and rituals that really had good reasons behind them, we could probably escape that; but I’m not entirely sure we can. We can use Darwin’s birthday—but why not the first edition publication of On the Origin of Species? And Darwin himself is really that important, but why Sagan Day and not Einstein Day or Niels Bohr Day… and so on? The winter solstice itself is a very powerful choice; its deep astronomical and ecological significance might actually make it a strong enough attractor to defeat all contenders. But what do we do on the winter solstice celebration? What rituals best capture the feelings we are trying to express, and how do we defend those rituals against criticism and competition?

In the long run, I think what usually happens is that people just sort of start doing something, and eventually enough people are doing it that it becomes a tradition. Maybe it always feels awkward and insincere at first. Maybe you have to be prepared for it to change into something radically different as the decades roll on.

This year the winter solstice is on December 21st. I think I’ll be lighting a candle and gazing into the night sky, reflecting on our place in the universe. Unless you’re reading this on Patreon, by the time this goes live, you’ll have missed it; but you can try later, or maybe next year.